Columbus McKinnon Corporation (CMCO) Q2 2013 Earnings Report, Transcript and Summary

Welcome, and thank you for standing by. [Operator Instructions] Today's conference is being recorded. If you should have any objections, you may disconnect at this time. It is now my pleasure to turn the call over to Mr. Tim Tevens, President and CEO. Thank you. Sir, you may begin.

Thank you, Emily. Good morning, everyone, and welcome to our call this morning to review the results of our second quarter of fiscal year 2013. With me here today is Greg Rustowicz, our Vice President of Finance and CFO. Please note and maybe you already have them downloaded hopefully as we have included summary slides for the quarter for your review, they can be found in our website at www.cmworks.com/investors. And hopefully, that will help you follow our comments here today. I also want to remind you that we -- that the press release and the accompanying slides in this conference call may contain some forward-looking statements within the meaning of the Private Litigation Reform Act of 1995. These statements contained known and unknown risks and other factors that could cause the actual results to vary. You should, in fact, read the periodic reports that Columbus McKinnon files with the SEC to be sure you understand these risks. Okay. Let me just start on Slide #3, if you have that deck in front of you. This is a reminder that our long-term objectives include growing to be a $1-billion business, about 1/3 of our revenue in developing markets and 2/3 in developed markets. Along with some acquisitions in the couple hundred million to $300 million area. Our target is 12% to 14% operating margin, strong working capital levels and an overall very solid balance sheet. We would continue to focus our resources and energy on making acquisitions that strategically add market presence and product breadth to help us grow around the world. Flipping to Page 4. I just want to provide some highlights of fiscal '13 and then, actually, Gregory here will get into some details in a moment. I'll talk about the second quarter. Our revenue was down 2.3%, but I think if you considered the negative effect of foreign currency translation and a divestiture that we did this past July, removing those, it was up 4%. Price and volume added 4% in the quarter. The U.S. revenue was positive this quarter, up 7.5% if you exclude the divestiture I just mentioned. Non-U.S. sales were flat in that a currency translation and a very small acquisition we did in South Africa last year. Our European business, EMEA, excluding currency translation and that acquisition, actually grew 2.5%, which we find to be very favorable and positive. Our Latin American and Asia-Pacific business continue to grow at double-digit rates, and we feel very good about the investments we're making in those emerging economies. A little comment about our bookings, we have seen global bookings in this quarter flat with last year, net of currency translation. We did see some bright spots. General industrial distribution, material handling specialists and our entertainment industry seem to be going quite well right now. We also have a line of special hoists that are sold to the oil and gas industry that seems to be doing well. Europe is still growing, as I mentioned, excluding the effects of currency but at a very slow rate. And as I mentioned, Asia-Pacific and Latin America continue to book well and are growing rapidly, driven by our strategic investments. Our gross margin expanded 270 basis points over last year, up almost to 29% gross margin. And our operating margin expanded by 60 basis points to 8.8%. Our leverage year-to-date is a very strong 62%, which we continue to be very proud of. Our earnings per share of $0.42 in the quarter is up from a $0.34 last year number. Greg will cover more details on those in a moment. We also did generate $7.6 million in cash from operations for the first half of the year. Page 5. Let me just cover sales just for a moment. You can see that our volume and price was up 5.6%, excluding the foreign exchange translation, and we also had 1 less shipping day in this quarter than the last year and netting out the effect of the acquisitions and divestitures that we did, and you can see volume was 2.6% and price was 3%. Our U.S. sales, as I mentioned, increased 4.1% up to $83 million in the quarter and that was despite a negative impact from our divestiture and 1 less operating day that we have. I mentioned that the non-U.S. sales decreased by 9.5%, but if you exclude the foreign currency impact and the South African acquisition, the sales were in fact flat and our non-U.S. sales represented about 43% of sales for the quarter. So I'll ask Greg to pick it up on Slide #6.

Thank you, Tim, and good morning, everyone. On Slide 6, our second quarter consolidated gross profit dollars increased by $3.2 million or 8.1%, and our gross profit margin improved 270 basis points to 28.9%. Our gross profit increase was driven by pricing gains over inflation of $2.7 million as well as productivity improvements in our manufacturing facilities of $1.6 million. We also had lower product liability costs of $900,000 compared to a year ago. In addition, the South African subsidiary we acquired last December also added additional gross profit of $400,000. Finally, foreign currency translation had a $2.1 million negative impact on gross margin this quarter. On Slide 7, selling expense increased 6% from the prior year in dollar terms and represented 11.2% of sales this year compared to 10.3% last year. The increase in selling cost is primarily related to the new sales offices that we've established in Turkey, North Africa and the United Arab Emirates, as well as the incremental selling cost from the South African acquisition we acquired last December. In addition, foreign currency translation had a favorable impact on selling expense of $1.1 million this quarter. G&A expense increased $1.6 million compared with the prior-year, representing 8.6% of sales versus 7.3% in the prior year. While $300,000 of the increase was related to our ERP system implementation, other increases were due to benefit-related items such as pension, group health costs and relocation costs, which together totaled $700,000. Of the $1.6 million increase, approximately $700,000 of the increase was for non-recurring items. We expect our SG&A run rate to be approximately $30 million per quarter. Turning to Slide 8, operating income increased by 4.9% to $12.9 million or 8.8% of sales compared to 8.2% of sales in the previous year. The improvement in operating income is being driven by the net pricing gains over materials' inflation as well as the continued improvement in operating efficiencies previously discussed. As you can see on Slide 9, income per diluted share for the second quarter of fiscal 2013 was $0.42, reflecting an $0.08 increase from the prior-year period where we reported earnings of $0.34 per share. The effective tax rate in the quarter was 15.6% versus 31.5% in the prior-year period due to the mix of earnings in the U.S. versus our foreign affiliates and the fact that we have a valuation allowance against our deferred tax assets in the U.S. On a pro forma basis, at a 38% tax rate and excluding income from discontinued operations that we had in the previous year, earnings per share in the second quarter of fiscal '13 were $0.31 per share versus $0.29 per share in the second quarter of fiscal 2012. Our expected effective tax rate for fiscal 2013 is expected to be between 15% and 20%, based on the geographic mix of earnings that we anticipate. On Slide 10, we have compared our year-to-date performance for several key metrics. Year-to-date, revenue is up 3.4% largely driven by volume and price increases, offset by $14.4 million of unfavorable foreign currency translation. Gross profit is up 15.2%, and gross profit margin has expanded 290 basis points to 28.8%. Higher volumes and net pricing over material inflation, along with manufacturing efficiencies, drove the margin expansion. Year-to-date operating income is up 31.6% as a result of the additional gross margin, despite higher SG&A costs. Operating leverage for the first 6 months of the year is a strong 62.6%. Finally, year-to-date earnings per share is $0.85 per share versus $0.48 in the previous year. Turning to Slide 11, our working capital as a percent of sales increased to 19.4% in the current quarter from 17.6% in March 31, 2012. This increase is largely driven by lower accounts payable balances and the payment of certain liabilities that were accrued as of our fiscal year-end. As a percent of sales, these 2 items negatively impacted this metric by 2.1%. Inventory turns of 3.7x were lower than the most recent fiscal year-end level of 4.3x due to higher inventory levels associated with projects that we expect to ship this quarter, as well as softer sales volumes in the quarter. We do expect to improve inventory turns by year end and expect to achieve inventory turns of at least 4x. On Slide 12, you can see we generated $3.5 million of operating free cash flow in the second quarter of fiscal 2013. Capital expenditures were $4.1 million versus $7.2 million in the previous year. We expect the capital expenditures for fiscal 2013 to be in the range of $12 million to $15 million. Finally, on Slide 13, you can see that as of September 30, 2012, net debt was $57.6 million, and total gross debt was $152.5 million. Net debt to net total capitalization was 24.6%, which is lower than our 30% net debt to net total capitalization ratio goal. In addition to having $94.9 million of cash in our balance sheet at September 30, we have an additional $72.6 million available under our previous $85 million senior credit facility, which is net of $12.4 million of outstanding letters of credit. With the new $100 million 5-year senior credit facility, which was closed on October 19 and replaces the previous $85 million senior credit facility, we have added an additional $15 million of borrowing capacity. In addition, the new facility provides more flexibility and improved pricing. This new facility, along with our healthy cash balance, provides significant liquidity to support our strategic growth plan. With that, I will turn it back over to Tim to cover the fiscal third quarter outlook.

Thanks, Greg. So let me begin on Slide 14, and let's talk a little bit about bookings. As I said, overall, the bookings are slowing. Emerging markets are going very strong but at this point, we are small in those markets and not economically linked, and our investments are bearing fruit for us. There's now a bit of a tentative market in the U.S., possibly waiting for the results of election, seeing what's going to happen with the fiscal cliff. There's a lot of conversation going on around both of those topics. Capacity utilization was at 77.4%, and that's not too bad for the U.S. market. It's hovering in that 78% area. Europe is very fragile, and our bookings in our hoists and rigging business are flat, which is actually pretty good, given the -- maybe the economic condition that is there right now, but it isn't declining in our Engineered Products business and that's the project -- major project business that we talked about. Currency translation is -- will remain a headwind for a while longer. Capital utilization is down slightly to 77.8% in the market -- in the European market. Our backlog remains very good at $105 million. It was negatively affected by the divestiture that we talked about that we made this past quarter. Most of our backlog is indeed scheduled to ship this quarter or December quarter. And as you know, we continue to make these strategic investments around the world and really focusing on cost control in markets where we think things are not going to grow as rapidly as once expected. So with that, let me, at this point, turn it over to questions, Emily?

[Operator Instructions] And, sir, our first question today comes from Jason Ursaner from CJS Capital.

So, Tim, you're generating very strong free cash flow right now. The balance sheet is continuing to improve, and I know that shareholders have been waiting a long time on acquisitions. And financially, the company is in better shape now than at any point in recent years. You're under-levered relative to your target. You expanded your liquidity. So how close realistically do you think the company is getting to putting its balance sheet to work? Obviously, I'm not asking for targets or dates, but just general timeframe, general number of targets. And internally, how are you going to benchmark this versus something like a share repurchase or a dividend?

Yes. Great, great question. As a matter of fact and I think, Jason, we've talked about this in the past. Our Board regularly revisits our balance sheet and our direction and our strategy and the use of cash -- the strategic use of cash. #1 on our list remains strategic growth and to invest in markets that are of interest to us and look for those target acquisitions. Jason, we have a list of 20 or 25 companies that we are in various stages of dialogue with. And because we have a targeting program that we go through rather than responding to a company that's for sale, we're actually going into a company that's not for sale today and developing a dialogue around how, together, we might be a stronger force in the marketplace, and that takes some time. Arguably, I would have liked to have a couple of these done by now but they -- some have skipped by us in that we couldn't come into an agreement with the owner, but there are numerous conversations that we're having now, and I would expect and like to put our balance sheet to work in this regard from an acquisition standpoint in the next year or so. However, having said that, as you can see, Jason, we are doing a nice job in the balance sheet and generating a lot of cash flow, and our cash is building. Greg did a great job with our support of banks and the key group to put a new revolver in place, so we're prepared to have that as well going forward. The dialogue with the Board remains. We will put this balance sheet to work one way or another. So if the acquisitions don't come through in a meaningful way in, let's say, a short-term like a year or so that we would seriously consider doing the dividends side or the share repurchase and I guess that it's fair to say that's yet to be specifically determined by our Board at this point.

Okay. And can you just remind me if you do have an authorization in place?

We do not, Jason.

And in terms of targets you're talking to, obviously, if you're looking in certain geographies where there's faster growth, you're going to pay a multiple that reflects that. But are you seeing targets out there that are anywhere near kind of where your own company is trading at?

Nothing this low. What are we trading at, Jason? 5 or 6x?

You mentioned the uncertainty next year but, yes, you're 11x this year's earnings on a fully tax basis. I mean there's nothing out there in that range.

Well, I would say -- no, I would say that there shouldn't be -- there should be some. When we say a multiple, we're talking about a multiple of EBITDA. I think you're talking about a multiple EPS. The people that we're speaking to, when we get to the point of valuation, they're in a reasonable industrial multiple normally of 6x to 8x.

Okay. And then just next question, I want to concentrate quickly on the U.S. Did you give an actual figure for volume year-to-year, excluding Gaffey and the shipping day?

Well, that's a darn good question, but I can tell you that -- I can give you that. In the U.S., volume and price, excluding the shipping day and the Gaffey divestiture, was 9.1% growth for the quarter in the United States. Volume is the bulk of that at 6.2%, and price was about almost 3%.

So the volume of a little over 6%, that's comparing last quarter to, I think, closer to 15%, can you just talk about how it trended throughout the quarter? Obviously, August was a pretty tough month for a lot of industrial companies. How quickly would you see this translate into your business? And have you seen any bounce-back since with some of the better data points that have been coming out?

Yes. Good, good question. It's -- and we are linked to our booking schedule as you know because we don't have, for most of our business, at least a lot of lead time and major projects. But -- so as we track our bookings, it's clear that mid-August is when we started to see some level of decline in a meaningful way. That's spread through September. And September, actually, got -- had gotten worse to the point where we had a reasonable quarter from a booking standpoint, basically flat. I would say that if you look to the future and you look in through October, we're starting to see some bounce back and some decent order levels right now. I would like -- obviously like to see them much higher, but they're -- they have improved. I'd love to put my finger on the reasons why -- and the causes, but I do think that there is just a general slowing around the world that's causing us to -- and our channel partners and our end-user customers to be a bit on the slow side.

All right. And maybe putting it in another way, given what you saw in August and September and the traditional seasonality from Q2 to Q3, would you think on a daily booking rate level that you might have seen the trough in Q2 for this year?

I -- it's hard for me to project that, but that would be wonderful if that was the case. So far, in October, which, as you know, I only have 2 weeks -- I'm sorry, 3 weeks' worth of data, and that is the case.

Jason, just to add, we will also have 2 additional shipping days in the -- in our Q3 this year versus last year.

Right. No, I understand. I was just looking at it on a more daily rate basis. And then just last question and I'll jump back in the queue, the deferred tax allowance, I think it's been 7 quarters now since the original reversal?

Yes.

When would you expect the reversal on the P&L?

It's likely sooner rather than later. It could be end of the year. It could be beginning of the following year. But we're going to be having discussions with our auditors shortly on that topic.

[Operator Instructions] And, sir, our next question comes from Joe Mondillo from Sidoti & Company.

I missed the total U.S. volume and non-U.S. volume. I was wondering if you could repeat that? Growth?

Of the growth?

Yes.

Let me see if we can do that. So U.S. volume, overall, was up 4.1%. If you exclude the Gaffey divestiture and the 1 less shipping day that we had in this quarter this year compared to last year, the volume and price together was 9.1% growth in the U.S.

Okay. And non-U.S.?

And outside the U.S., the -- if you, again, exclude foreign currency, which had a negative impact of about 10.2% on volume outside the U.S. We had a small acquisition, you might recall, Joe, last December in South Africa. If you exclude that as well and if you exclude the 1 fewer shipping day, our overall volume and price was up about 1.6%.

Okay. Great. Next question, in terms of gross margin, I think you said last quarter that you saw that one-time large rail crane order that extended back a few years ago, that's sort of -- it was a net basis that inflated your gross margin. And I think excluding that, it was around 27.5% gross margin?

It was an 80 -- if my memory serves me, Joe, it was an 80 basis point impact versus what we reported in our Q1.

Okay. So that would make it 27.8 and you shot up sequentially from that 27.8 x that rail crane order to 28.9 in this quarter, but your sales base was lower from the first quarter. So I'm just wondering how you're seeing -- and I think the pricing actually was similar quarter-to-quarter. I'm just wondering where you're seeing that massive improvement?

It's really 2 pieces to answer your question. One is our productivity. We continue to see strong productivity. So on a sequential basis, which is really what you're asking, our productivity was up about $1.7 million. And then the other piece to it as well was we have been experiencing favorable product liability claims data and that added about $1.7 million on a quarter-over-quarter basis, sequentially.

The Forging business, Joe, is doing significantly better, which is the bulk of this productivity gain that Greg has mentioned.

Okay. And is that -- you said in the past, volume is the #1 sort of thing that would get profitability up in that. Is that mainly -- have you seen a big improvement in volume? Is that mainly the cause?

Sequentially, our volume was down about $1 million.

Okay. So what have you done with -- what have you done there?

From a productivity standpoint?

Yes, yes, to get the cost improvements?

Yes, cost improvements and productivity gains, and we've added some key machine tools that have allowed us to get some of these productivity gains which has been great. We reduced our past due backlogs to our customers to the point where that's negligible now. So just a lot of good hard work, good poll systems have been put in place for key product groups. We're reaching back to the suppliers to get better poll systems from our supply base. So just good hard manufacturing work to get our productivity up and reduce our cost.

Has there been any headcount reduction there?

No.

Nothing to speak of. Nothing material.

Okay. And then last question, just in terms of the G&A expenses, in the release -- and I believe you said in your prepared remarks, you said there's a sort of $700,000 related to sort of one-time expenses?

Correct.

But then, you said also in your prepared remarks that you expect SG&A as a total to remain around $30 million. So I was wondering, sort of, where's the -- what am I missing there? Because it was right around $29.5 million and if you take out that $700,000 that gets you down to $28.7 million. I'm wondering -- how do you get up towards the $30 million again?

I think what we had on the slide was approximately $30 million, which is what we had said previously. So there's always going to be projects that we've got to improve the company and some of those require personal services. So it's going to be in that $29 million to $30 million range.

[Operator Instructions] And, sir, at this time, I'm showing no questions.

Well, thank you, Emily, and thank you everyone. But let me just conclude by summarizing for you all the -- we do expect the rest of fiscal '13 to be slow growth for us but continue to see very positive operating leverage that we've demonstrated so far in the first half. Our investments in the emerging markets continued to bear fruit, and we expect the U.S. to continue to grow, albeit at a slower rate. I think that Europe will be in a very slow growth mode for us maybe even some negative growth at our Engineered Products business, which we're watching very carefully. And as you know, we remain really well positioned to continue to execute our strategic plan to profitably grow our business around the world as we have about $95 million in cash and the new $100 million revolver to help us. We continue to have multiple discussions with businesses that could add strategic value to the company. Our targeting process takes time, and these businesses are generally not for sale. So introductions and in-depth discussions need to take place before any agreement can be reached. This takes some time. We continue to make strategic investments in selling expense in emerging markets, such as China and Brazil, and certainly invest in new products and services to help sell our products around the world. I want to thank all the Columbus McKinnon associates around the world for their dedication to excellence in making our company a stronger, well-positioned organization to profitably grow into the future. And as always, we appreciate your time today. Thank you, and have a good day.

This does conclude today's conference. Thank you so much for joining. You may disconnect at this time.